Gratuity Calculation Worksheet (Sri Lanka)

Eligibility threshold

The obligation arises when an eligible employee ceases employment after completing five or more years of continuous service with the same employer.

• 4 years and 11 months: NOT eligible
• 5 years and 0 months: eligible
• 7 years and 9 months: treated as 7 years for computation purposes
• Continuity of service is generally preserved through legitimate leave, statutory maternity leave, and sick leave

Triggers — when gratuity becomes payable

The 30-day payment clock starts from the date employment ceases. Failure to pay within 30 days may expose the employer to penalties.

• Resignation after completing 5+ years
• Employer-initiated termination (misconduct or retrenchment) after 5+ years
• Retirement
• Death during employment (payable to legal heirs)
• Expiry of a fixed-term contract after cumulative 5+ years of continuous service

The gratuity formula

Gratuity = (Last-drawn monthly basic salary ÷ 2) × Number of completed years of service

• Last-drawn monthly basic salary: the basic salary in the final month of employment (exclude allowances)
• Completed years: only full years count — months do not round up
• Example: employee with 12 years of service and LKR 150,000 basic salary → (150,000 ÷ 2) × 12 = LKR 900,000
• Example: employee with 7 years and 9 months → (basic ÷ 2) × 7 = computation for 7 years only

Worksheet fields

Tax treatment

• Gratuity payments up to the prescribed threshold are exempt from income tax
• The portion exceeding the exemption threshold is taxable under the APIT framework
• The taxable portion should be reported in Schedule 02 of the APIT annual statement
• Verify the current exemption threshold from the IRD before processing — the amount is updated periodically

Provisioning for future gratuity obligations

Unlike EPF and ETF, gratuity has no monthly remittance. The obligation accrues silently against every long-serving employee. Employers should maintain a gratuity provision in the balance sheet and review it annually during the year-end close process.